ECB’s Joachim Nagel stated that there is a “high bar” for additional rate cuts since both inflation and policy rates are at 2%. This stance is bolstering the euro, with markets not anticipating further rate reductions. Nagel suggests rates will likely remain unchanged in September, despite Germany’s economic struggles. He emphasised central bank independence, describing it as essential for effective monetary policy, amid concerns about political influence on monetary authorities.

Eurozone Equilibrium

In an interview at the Fed’s Jackson Hole symposium, Nagel noted the eurozone’s “equilibrium” and indicated minimal justification for further cuts after eight quarter-point reductions. He downplayed a steep decline in German GDP in Q2, suggesting growth might resume by 2026 with increased public spending. His comments reinforce expectations for the ECB’s Governing Council to maintain its current stance in September, reflecting decisions made in July when rates were left unchanged. The importance of maintaining monetary policy autonomy remains a central theme as attention grows on external pressures faced by the U.S. Federal Reserve. We are seeing strong signals that the European Central Bank’s rate-cutting cycle has come to an end for now. With the latest flash estimate for August inflation coming in at 2.1%, just above the 2% target, the commentary suggests a “high bar” for any further easing. This hawkish tone is likely to put a floor under short-term European interest rates in the coming weeks. For those trading the euro, this outlook is supportive, suggesting strength against currencies with a more dovish central bank outlook. We’ve seen markets aggressively price out further easing, with the implied probability of a September cut now falling below 15% from over 50% just last month. Options strategies that benefit from a stable or rising EUR/USD, such as selling out-of-the-money puts, could be considered.

Interest Rate Markets Shift

In interest rate markets, this signals a time to unwind bets on further rate cuts. Looking back, the ECB delivered eight consecutive cuts starting in mid-2024, so this pause represents a significant shift in policy. We expect to see selling pressure on short-term rate futures like Euribor contracts, pushing their implied yields higher to reflect the new on-hold stance. We must watch the incoming economic data closely, as it presents a conflicting picture. While inflation remains the focus, Germany’s economy shrank by 0.4% in the second quarter, and the latest flash PMI for the Eurozone slipped to 49.7, indicating a slight contraction. A further sharp deterioration in growth is the main risk that could challenge this new hawkish stance.

Bắt đầu giao dịch ngay bây giờ — nhấp vào đây để tạo tài khoản VT Markets trực tiếp của bạn.